Exchange Traded Funds for Dividend Investors

Buying high dividend yields ETFs is the easiest and cost-effective way to capture dividends. It can also help at deriving tax benefits by exchanging capital gains (taxed at 30% for most of us) for dividend gains (taxed at 15% usually). If you have short positions on high-yield stocks, these ETFs will pay you de-facto "tax-free & hassle-free" dividends. See also: REIT ETFs.

streetTRACKS SPDR Dividend (SDY)

The streetTRACKS SPDR Dividend (SDY) is a basket of the 50 highest-yielding stocks in the S&P 500 index that have increased dividends for at least 25 consecutive years.

The index is weighted by yield, no single stock should have a weight of more than 4% of the index, but no single stock can have a weight of more than 4% of the index.

With 0.35% management fees, less concentration on financial and utilties, and a transparent formula, SDY is an attractive choice. More Info.

Morningstar Dividend Leaders (FDL)

The First Trust Morningstar Dividend Leaders Index Fund (FDL) is likely to have a lower overall yield but experience less volatility than SDY.

FLD tracks the Morningstar Dividend Leaders Index, which consists of the 100 highest-yielding U.S. stocks whose dividends are equal to or greater than what they paid five years ago. Only earning dividends are considered.

Unlike the other dividend indexes, Morningstar factors a stock's market cap, as well as the dividend yield. The index is weighted by "available dividends," meaning the stock's dividend multiplied by the "float" -- the percentage of shares available for trading. This partial weighting on market capitalization is the reason why FLD will often have lower income than DVY or SDY, that weight stocks only based on yield. The flip side of course is less volatility in the overall funds value, since the average capitalization of the stocks in the index is higher.

Like most dividend indexes, the Morningstar benchmark leans heavily to financial stocks. It takes a low 0.30% management fees. More Info.

iShares Dow Jones Select Dividend (DVY)

iShares Dow Jones Select Dividend Index Fund (DVY) uses a similar but more complex formula than SDY.

To be in the dividend index, a stock must have positive historical five-year dividend-per-share growth, have paid out an average 60% or less of earnings over the past five years, and meet trading volume requirements. The dividend index consists of the top 100 stocks, ranked and weighted by dividend yield, that meet these criteria.

DVY is the oldest and largest of the dividend ETFs, but charges a higher 0.40% management fees. More Info.

PowerShares Dividend Achievers

The PowerShares Dividend Achievers Portfolio (PFM) is both the less transparent and the most expensive of the dividend ETFs.

It is based on the Mergent Broad Dividend Achievers Index, which consists of U.S. equities with high yield and at least 10 consecutive years of dividend growth. REITS and limited partnerships are excluded from the index. This index is "proprietary", so you will never know what's exactly in it. In addition, with 0.50% management fee, this is the most expensive dividend ETF.

In addition to PFM, there are 4 "flavors" of this Mergent Broad Dividend Achievers Index:

  • An international flavor: the PowerShares International Dividend Achievers Portfolio (PID). In addition to the stock in the Mergent International Dividend Achievers Index, this ETF holds American depositary receipts and foreign common stocks that trade on major U.S. exchanges. The foreign stocks that qualify must have increased its dividend for five consecutive years. PID is the only Dividend ETF with foreign exposure.
  • A High-growth flavor: The PowerShares High Growth Dividend Achievers Portfolio (PHJ) takes the 100 stocks with the highest 10-year compound annual dividend growth rates from the same Mergent High Growth Dividend Achievers Index.
  • A More volatile version: The PowerShares High Yield Equity Dividend Achievers Portfolio (PEY) works similarly but over a narrower base. It's based on the Mergent Dividend Achievers 50 Index, which holds the 50 highest-yielding stocks of the broad Mergent dividend index.
  • Vangard also offer a ETF based on the same index, but with about a third less stocks: Vanguard's Dividend Appreciation VIPERs (VIG). Vangard only takes 0.28% management fees, so If for some reason you like the Mergent Broad Dividend Achievers Index, VIG may be your best bet.